It’s always nice when a sharp eMail comes in to spice up the day! Assiduous Reader JT writes in and says:
James I was surprised and shocked to see no comment on the PrefBlog about Home Capital!!
I am sure you have an opinion, since the regulator is deeply involved and may have pushed HCG into that capital raise.
I am sure I’m not the only regular viewer wondering what you might have to say.
I wait with interest with your comments.
Well! As we know the story so far begins with the OSC Statement of Allegations:
2. On July 10, 2015, HCG announced that an ongoing review of its business partners had led it to terminate certain brokers, causing an immediate drop in Originations. The next trading day, HCG’s stock price fell 18.9%, resulting in an approximate $600 million loss in market capitalization and significant investor harm.
3. Prior to this announcement, from February 2015 until July 2015, HCG misled its shareholders as to the immediate and on-going causes of the decline in Originations. Internally, HCG knew it had terminated certain brokers because it had discovered fraud in HCG’s broker channels. In fact, in February 2015, HCG was completing a six-month investigation into fraudulent employment income documentation (“Project Trillium”) which was overseen by a special committee of the Board of Directors (“the Board”). Project Trillium confirmed that HCG was receiving fraudulent employment income documentation through its broker channels which had not been detected by HCG’s underwriting controls. In particular, the findings of Project Trillium highlighted the scale of the fraudulent documentation flowing through HCG, and the serious systemic underwriting control deficiencies within HCG. Given the findings of Project Trillium, HCG implemented two significant changes: (1) termination of certain broker relationships; and (2) specific remediation of its underwriting processes and controls.
This gradually led to a very nasty time for the company’s investors:
Short sellers are gloating, investors are writhing in pain – and everyone else is wondering whether Home Capital Group Inc.’s troubles will reverberate beyond the home lender’s withering stock.
The share price of the Canadian mortgage lender fell 65 per cent on Wednesday, extending the total decline this year to more than 80 per cent.
There were funding difficulties and speculation of a ‘Wile E. Coyote Moment’ for Canadian house prices:
Home Capital revealed Wednesday that clients pulled money out of its high-interest accounts over past four weeks, with balances falling $591-million to $1.4-billion. The company said the pace of withdrawals picked up in the past week. Many of Home Capital’s customers are relatively sophisticated.
…
Home Capital plans to right the ship by locking in capital, which in turn will stem the exodus of deposits. If that happens, this crisis of confidence will pass. Traditional factors such as interest rates, supply and demand will set prices in residential real estate markets. But if Canada’s alternative mortgage lenders face an unexpected liquidity crisis, the housing market is in for a potentially nasty downturn.
Now it seems that emergency funding at a penalty rate has alleviated the panic a little:
Home Capital Group Inc. shares roared back Thursday, as the beleaguered mortgage lender firmed up an emergency multibillion-dollar loan and signalled that it may sell itself.
The stock closed up 34 per cent on the Toronto Stock Exchange, its biggest one-day increase in more than 20 years, as some investors wagered that the company is regaining its financial footing – at least for the time being.
…
In a release on Thursday, the company said it had a firm commitment on a $2-billion credit line with a 10-per-cent initial interest rate and a $100-million initial fee from a “major Canadian institutional investor.”
However, DBRS has downgraded the firm:
DBRS Limited (DBRS) has today downgraded Home Capital Group’s (HCG or the Group) Senior Debt rating to BB from BBB (low) and its Short-Term Instruments rating to R-4 from R-2 (low).
…
Concurrently, DBRS has placed all ratings Under Review with Negative Implications
…
To address its deteriorating liquidity position, the Group announced this morning that it has reached an agreement in principle with a major institutional investor for a credit line of up to $2.0 billion, for which it expects a firm commitment later today. This high-cost 364-day facility would be secured against a portfolio of HTC mortgages. In exchange for the immediate liquidity, HTC would be required to pay a $100 million non-refundable commitment fee and make an initial withdrawal of $1.0 billion. The interest rate on outstanding balances would be 10.0% in addition to a standby fee on undrawn funds of 2.5%. In DBRS’s opinion, the resulting interest and fee payments totalling $225 million at best, or $300 million if fully drawn, over the next year on the facility would put material pressure on earnings. Indeed, even in the best-case scenario of drawing the minimum $1.0 billion on the facility, these costs would represent 67% of the Group’s FY2016 income before taxes of $335 million. Moreover, other funding costs are likely to trend higher while originations are likely to decline, given the recent provincial government’s proposed measures to temper the overheated Ontario housing market, placing further pressure on earnings.
… with S&P not far behind:
S&P Global Ratings said today it lowered its long-term issuer credit rating on Home Capital Group Inc. (HCG) to ‘B+’ from ‘BBB-‘ as well as its short-term issuer credit rating to ‘B’ from ‘A-3’. At the same time, we lowered the long-term and short-term issuer credit ratings on Home Trust Co. to ‘BB’ and ‘B’ from ‘BBB’ and ‘A-2’, respectively.
…
On April 27, HCG announced that its subsidiary, Home Trust, has reached a binding agreement with a major institutional investor for a 364-day credit line in the amount of C$2 billion (of which C$1 billion has to be initially drawn), which would be secured against a portfolio of mortgages originated by Home Trust. While the access to the credit facility serves to fortify liquidity amid increased market anxiety, we believe the terms are highly onerous. We estimate that with an upfront non-refundable commitment fee of C$100 million, an interest rate of 10% on balances outstanding, and an additional 2.5% standby fee on undrawn funds, the all-in cost to borrow the first C$1 billion is an effective annual rate of 22.5%.
Well, I don’t really have a big problem with the regulators on this one. The allegations are serious and will be hard to defend at the hearing. There may have been some regulatory involvement in the funding agreement and contemplated sale – which would be grossly improper – but I’m not going to jump the gun on this one; I’ll wait until evidence, if any, emerges regarding regulatory clerks pretending to be hot-shot determiners of corporate financing.
It is, however, interesting to compare this with what happened with Manulife during the crisis, in which a major capitalization problem was addressed by sucking political arse until the rules were changed, mitigating the problem dramatically. Being a member of the Club can have great value, well worth a few highly paid positions on the payroll for ex-regulators!
I’m much more interested in the recent regulatory grandstanding over binary options:
The Canadian Securities Administrators (CSA) today published for comment National Instrument 91-102 Prohibition of Binary Options. The proposed instrument would prohibit advertising, offering, selling or otherwise trading a binary option to an individual.
The details admit the pointlessness of this sound and fury:
By publishing the Proposed Instrument, we are not suggesting that current offerings of binary options in Canada are legal. Many of these products and the platforms selling them have been identified as vehicles to commit fraud. We emphasize that no offering of these products, including by a broker, dealer or platform, has been authorized in Canada. All current offerings in Canada are therefore illegal, with only limited and narrow exceptions for transactions with highly sophisticated investors.
Nevertheless, some persons are using misleading information to promote these products as legal and legally offered. It is our intention that the Proposed Instrument will make it explicitly clear that these products may not be advertised, offered, sold or otherwise traded to an individual in Canada
In other words, the regulators are so upset that criminals are offering these products that they’re going to make it illegal for Canadian firms to compete with the criminals to meet the demand. That’ll show ’em!
I discussed the regulators lackadaisical attitude toward binary options fraud on March 1, noting:
It’s much easier and just as well rewarded to simply sit in the office and play ticky-box with desperately cooperative Canadian firms.
Readers of the Globe story that I linked at the time will remember:
[senior investigator at the Manitoba Securities Commission ] Mr. [Jason] Roy said it is not easy for Canadian regulators to go to Israel to seek justice, however. He said investigators cannot identify the perpetrators behind the frauds.
[A fraud victim’s son] Mr. [Tomas] Ferreira said his family was contacted by a lawyer in Israel who is trying to win restitution for victims. He would also like Israeli police to investigate and lay fraud charges.
How about that, eh? It never occurs to our Wise Regulators to go after the fraudsters in their home jurisdictions. It never occurs to them to pick up the damn ‘phone and call the damn Israeli Securities Authority to develop a campaign … or to hire their own Israeli lawyer to start causing trouble for the crooks. The only thing our beloved regulators know how to do well is play ticky-box with desperately cooperative Canadian firms.
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
|||||||
| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.8311 % | 2,153.7 |
| FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.8311 % | 3,952.0 |
| Floater | 3.54 % | 3.67 % | 51,013 | 18.13 | 4 | 0.8311 % | 2,277.5 |
| OpRet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.1569 % | 3,024.7 |
| SplitShare | 4.93 % | 4.37 % | 55,803 | 0.61 | 6 | 0.1569 % | 3,612.1 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.1569 % | 2,818.3 |
| Perpetual-Premium | 5.30 % | -0.14 % | 75,148 | 0.09 | 23 | 0.0769 % | 2,786.3 |
| Perpetual-Discount | 5.07 % | 5.06 % | 113,752 | 15.34 | 13 | 0.2393 % | 3,005.0 |
| FixedReset | 4.41 % | 3.99 % | 229,513 | 6.59 | 94 | -0.6214 % | 2,348.9 |
| Deemed-Retractible | 5.01 % | 4.74 % | 149,442 | 0.16 | 31 | -0.0811 % | 2,890.4 |
| FloatingReset | 2.52 % | 3.03 % | 53,899 | 4.50 | 9 | -0.4070 % | 2,535.1 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| SLF.PR.J | FloatingReset | -2.24 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 15.27 Bid-YTW : 9.09 % |
| MFC.PR.F | FixedReset | -1.90 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 15.48 Bid-YTW : 9.36 % |
| BAM.PF.A | FixedReset | -1.83 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-04-27 Maturity Price : 22.68 Evaluated at bid price : 23.11 Bid-YTW : 4.30 % |
| RY.PR.M | FixedReset | -1.61 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-04-27 Maturity Price : 22.12 Evaluated at bid price : 22.58 Bid-YTW : 3.99 % |
| CCS.PR.C | Deemed-Retractible | -1.61 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.81 Bid-YTW : 5.86 % |
| BAM.PF.E | FixedReset | -1.56 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-04-27 Maturity Price : 21.85 Evaluated at bid price : 22.12 Bid-YTW : 4.20 % |
| BAM.PF.H | FixedReset | -1.54 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2020-12-31 Maturity Price : 25.00 Evaluated at bid price : 26.19 Bid-YTW : 3.73 % |
| HSE.PR.C | FixedReset | -1.49 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-04-27 Maturity Price : 22.57 Evaluated at bid price : 23.15 Bid-YTW : 4.54 % |
| MFC.PR.I | FixedReset | -1.45 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.13 Bid-YTW : 5.18 % |
| IAG.PR.G | FixedReset | -1.42 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.83 Bid-YTW : 5.32 % |
| BAM.PR.T | FixedReset | -1.42 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-04-27 Maturity Price : 19.45 Evaluated at bid price : 19.45 Bid-YTW : 4.37 % |
| MFC.PR.J | FixedReset | -1.38 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.80 Bid-YTW : 5.15 % |
| BAM.PF.G | FixedReset | -1.36 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-04-27 Maturity Price : 22.57 Evaluated at bid price : 23.26 Bid-YTW : 4.25 % |
| TRP.PR.C | FixedReset | -1.34 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-04-27 Maturity Price : 15.49 Evaluated at bid price : 15.49 Bid-YTW : 4.06 % |
| BIP.PR.A | FixedReset | -1.34 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-04-27 Maturity Price : 22.78 Evaluated at bid price : 23.65 Bid-YTW : 4.82 % |
| RY.PR.J | FixedReset | -1.28 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-04-27 Maturity Price : 22.47 Evaluated at bid price : 23.06 Bid-YTW : 4.01 % |
| TRP.PR.E | FixedReset | -1.26 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-04-27 Maturity Price : 21.57 Evaluated at bid price : 21.97 Bid-YTW : 3.95 % |
| BAM.PF.F | FixedReset | -1.24 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-04-27 Maturity Price : 22.61 Evaluated at bid price : 23.16 Bid-YTW : 4.27 % |
| TRP.PR.B | FixedReset | -1.23 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-04-27 Maturity Price : 14.42 Evaluated at bid price : 14.42 Bid-YTW : 3.98 % |
| MFC.PR.K | FixedReset | -1.23 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.93 Bid-YTW : 6.10 % |
| BAM.PR.Z | FixedReset | -1.21 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-04-27 Maturity Price : 22.16 Evaluated at bid price : 22.85 Bid-YTW : 4.38 % |
| BAM.PF.B | FixedReset | -1.20 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-04-27 Maturity Price : 21.74 Evaluated at bid price : 22.22 Bid-YTW : 4.17 % |
| TRP.PR.G | FixedReset | -1.09 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-04-27 Maturity Price : 22.76 Evaluated at bid price : 23.70 Bid-YTW : 4.15 % |
| GWO.PR.G | Deemed-Retractible | -1.02 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2017-05-27 Maturity Price : 25.00 Evaluated at bid price : 25.16 Bid-YTW : 1.91 % |
| GRP.PR.A | SplitShare | 1.18 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2017-05-27 Maturity Price : 25.00 Evaluated at bid price : 25.70 Bid-YTW : -23.41 % |
| PWF.PR.A | Floater | 1.54 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-04-27 Maturity Price : 14.51 Evaluated at bid price : 14.51 Bid-YTW : 3.25 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| BMO.PR.K | Deemed-Retractible | 324,829 | YTW SCENARIO Maturity Type : Call Maturity Date : 2017-05-27 Maturity Price : 25.00 Evaluated at bid price : 24.98 Bid-YTW : 1.33 % |
| BNS.PR.H | FixedReset | 188,630 | YTW SCENARIO Maturity Type : Call Maturity Date : 2022-01-26 Maturity Price : 25.00 Evaluated at bid price : 26.43 Bid-YTW : 3.55 % |
| GWO.PR.H | Deemed-Retractible | 110,065 | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.15 Bid-YTW : 5.48 % |
| BMO.PR.L | Deemed-Retractible | 85,680 | YTW SCENARIO Maturity Type : Call Maturity Date : 2017-06-24 Maturity Price : 25.00 Evaluated at bid price : 24.98 Bid-YTW : 3.53 % |
| BAM.PF.I | FixedReset | 47,114 | YTW SCENARIO Maturity Type : Call Maturity Date : 2022-03-31 Maturity Price : 25.00 Evaluated at bid price : 26.11 Bid-YTW : 3.90 % |
| BMO.PR.C | FixedReset | 46,370 | YTW SCENARIO Maturity Type : Call Maturity Date : 2022-05-25 Maturity Price : 25.00 Evaluated at bid price : 25.72 Bid-YTW : 4.02 % |
| There were 54 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| CCS.PR.C | Deemed-Retractible | Quote: 23.81 – 24.64 Spot Rate : 0.8300 Average : 0.5850 YTW SCENARIO |
| TRP.PR.H | FloatingReset | Quote: 13.79 – 14.17 Spot Rate : 0.3800 Average : 0.2585 YTW SCENARIO |
| BAM.PR.R | FixedReset | Quote: 19.21 – 19.64 Spot Rate : 0.4300 Average : 0.3329 YTW SCENARIO |
| GWO.PR.G | Deemed-Retractible | Quote: 25.16 – 25.40 Spot Rate : 0.2400 Average : 0.1462 YTW SCENARIO |
| IAG.PR.G | FixedReset | Quote: 22.83 – 23.14 Spot Rate : 0.3100 Average : 0.2176 YTW SCENARIO |
| BAM.PR.T | FixedReset | Quote: 19.45 – 19.72 Spot Rate : 0.2700 Average : 0.1805 YTW SCENARIO |
Quite the story on the Home Capital and Home Trust situation. It creates some interesting wrinkles for the wrinkly set. Home Trust issues “GICs” through many brokers – the Guarantee, I presume comes from the Province of Ontario? So, if you are an investor who holds to maturity, you’ll eventually get your principal and interest, even if it has to come from the Guarantor?
Now, I know of a recently deceased person whose estate holds Home Trust GICs. The bank-owned brokerage will soon sell them with a “market value adjustment”. Since the same bank no longer offers Home Trust GICs for some unknown reason….. ;-( how is the MVA going to be calculated? Any idea or precedent what that yield is going to be – presumably between the 2.3% contract rate and the 10% bail-out rate?
Along the same lines of inquiry, suppose the bail-out did not occur. Do you think it possible the bill would eventually come to the GIC guarantor? How close are/were we to more dominoes falling, just in the case of Home Capital?
To think more broadly – some years ago it was clear that Ontario had essentially no capital behind the Pension Benefit Guarantee, so how big a capital cushion do they have for GICs? Are there enough outstanding from all issuers to shake the Guarantor if/as/when things begin to unravel?
I’m reasonably certain that Home Trust GICs are guaranteed by the CDIC which is the Canadian government.
I must say that it only dawned on me recently that the “high interest savings account” for the spare cash in my self-directed account is invested in Home Trust (HOM100). I transferred the money to DYN500 which is a similar high interest account but backed by Scotia bank. With the government of Canada backing, I wasn’t afraid of losing my capital but it would likely be a very annoying process to get my money back if Home Trust folded.
I read somewhere that Equitable Bank has also seen some recent outflows and they have a similar high interest savings account (EQB100) that you might want to stay away from.
Home Trust Company is a member of the CDIC.
estate holds Home Trust GICs. The bank-owned brokerage will soon sell them with a “market value adjustment”.
That will be something fierce. The executor might want to keep them in the estate until maturity.
One brokerage I know at one point that made a secondary market in GICs would buy them at a yield of 150bp over the best rate on their system for new issues and then sell them for 50bp over.
Given that they are about to become awash in Home Trust paper, they might simply stop buying, or yank up the buy-yield even more.
Along the same lines of inquiry, suppose the bail-out did not occur. Do you think it possible the bill would eventually come to the GIC guarantor? How close are/were we to more dominoes falling, just in the case of Home Capital?
I don’t know – I’m not familiar with Home Capital’s books.